Asian Development Bank (ADB) sees the soaring global oil prices as a 'considerable' risk to Bangladesh's economy and suggests that those must immediately be adjusted at the retail level to avoid any serious macroeconomic consequences.
"Retail fuel prices must be urgently adjusted to avoid serious macroeconomic consequences arising from continuing upward movement in international oil prices," the ADB said in its Quarterly Economic Update for March 2006, released Thursday.
Besides the global oil-price hike, the ADB said that political uncertainty and heightened pressures on the balance of payments are the two medium-term downside risks to the Bangladesh economy that has so far maintained a steady expansion in industry and services, supported by a strong recovery in agriculture.
"The impact of higher oil prices on the economy has been significant, but manageable so far, due to strong growth in remittances and exports. However, the oil shocks may have serious macroeconomic impacts in the periods ahead as the fuel prices in the global market are continuing to trend upward," it has added.
Higher petroleum prices have contributed to rising fuel subsidies that have further burdened the nationalised commercial banks and crowded out much-needed public investment, the bank said.
During the past two years, it said, the government raised the fuel prices modestly to shield domestic consumers from higher import costs but despite such price adjustment, the oil subsidy was estimated at over US$520 million or 0.8 per cent of GDP (Gross Domestic Product).
The ADB bank has restated its prediction of 6.5 per cent GDP growth rate for in fiscal 2005-06, higher than that of 5.6 per cent in the preceding year, reflecting a steady increase in domestic and external demand.
It said private consumption will be the main driver of growth during this period, bolstered by strong remittance inflows. The growth will also be underpinned by steady expansion in industry and services, aided by a strong recovery in agriculture, it added.
"Weakness in economic governance, inadequate physical infrastructure and high cost of trade, which impinge on export competitiveness, are three major behind-the-border barriers to trade and long-term growth potential," it said adding that these barriers must be addressed.
The bank said the agriculture sector has significantly recovered with a good summer crop and an encouraging expectation for the winter crop. This year's aman production is estimated at 10.8 million tonnes, an increase of 10 per cent over production a year ago.
Despite some disruptions in the delivery of key agro-inputs, the boro crop is expected to be close to the forecast of 14 million tonnes, provided that weather conditions continue to remain favourable.
In addition, early production estimates for maize, jute, potatoes, winter vegetables and both inland and marine fisheries are promising.
Driven by export-oriented manufacturing, the industrial sector continues to register robust performance, the bank said adding that in the first seven months of FY2006, output of medium and large scale manufacturing expanded by a strong 13.2 per cent, compared with the same period of the preceding year.
About monetary developments, the ADB said money and credit growth continues to be high despite a tight monetary policy stance.
In the 12 months ending February 2006, aided by a 23.5 per cent growth in reserve money, broad money increased by 18.1 per cent, it said adding that higher money and credit growth supported private sector activity but exerted pressure on the price level and exchange rate.
Bank-by-bank resolution strategies for the four nationalised commercial banks (NCBs) have made some progress with steps taken to revive the divestiture of the Rupali Bank.
Gross non-performing loan (NPL) ratios of NCBs declined from 24.5 per cent in the quarter ending September 2005 to 21.4 per cent in the quarter ending December 2005.
Despite some success in revenue administration reform, revenue collection continues to lag behind projection, the ADB said adding that revenue collection under the National Board of Revenue (NBR) during July-March of FY2006 increased by 12.4 per cent over the corresponding period of the preceding year.
"The promise of achieving major revenue gains through setting up the large tax payers units for income tax and VAT remains largely unfulfilled due to inadequate preparation and lack of operational clarity. Weak institutional capacity and poor quality at entry for projects are adversely affecting Annual Development Programme (ADP) implementation," the ADB observed.
The ADB said exports during July-February of FY2006 recorded a 17.9 per cent growth over the corresponding period of FY2005, led by strong growth in knitwear and woven garments.
Growth in imports has decelerated during the year, mainly reflecting a fall in the imports of food and consumer items as imports during July-February of FY2006, grew by 9.8 per cent, it added.
"Rising exports and slower-than-trend growth in imports caused the trade deficit to fall during the period. Although deficits on service and income accounts increased, migrant workers' remittances increased by a robust 23.8 per cent during the same period, turning the deficit in the current account balance into a surplus," the ADB said.
Inflation, on a point-to-point basis, declined to 5.7 per cent in February 2006 from 7.7 per cent in July 2005, the ADB said adding that although decelerating, the rate of inflation remains high by historical standards.
"The high inflation rate is caused by the growth in money supply and domestic credit, and the knock-on effects of higher international prices. The continuing upward trend in oil prices and depreciation of the Taka are likely to heighten price pressures," it added.
About power sector reform, the ADB said the reform process needs to be accelerated to further expanding power generation capacity, eliminating operational inefficiencies, reducing the cost of supply through greater public and private sector participation, and adopting a pricing policy to recover operational costs.